Some of my clients have questions about transferring assets outside of probate by putting their heirs on the deed or title to property. Although this may work for some clients in some situations, we need to be very careful about the transfer. For instance, there is more than one way to jointly own property in California. And the kind of joint title you create with your transfer will determine whether the transfer achieves your desired results. Each of the four ways to jointly hold title in California comes with its own advantages and disadvantages.
Tenants in Common – Tenants in common each own separate shares of the asset, which can vary in size. (E.g. I can own ¾ and my daughter can own ¼.) Each each tenant’s share is subject to seizure by his or her creditors and each can bequeath their own share to whomever they choose through probate or a trust. The cost-basis of each tenant’s share is determined individually so, when one tenant in common dies, there is no step-up in basis for the other co-tenants.
Community Property – Community property is one way California married couples and registered domestic partners can hold title to assets.* Each spouse/partner owns an undivided, 50% interest in the community property. While both spouses/partners are living, neither can sell or gift their half without the other’s consent and the entire asset is reachable by the creditors of either spouse/partner. However, each spouse/partner can bequeath their half of the community property to whomever they choose and, upon the death of one spouse/partner, both shares of the community property receive a stepped-up basis.
Community Property with Right of Survivorship – In California, holding title as community property with right a survivorship is like holding community property except that when one spouse/partner dies, their half of the asset transfers automatically to the surviving spouse/partner. The decedent’s share passes outside of probate, but it is still considered to be part of their taxable estate, and both shares of the property receive a stepped-up basis.
Joint Tenancy (a.k.a. Joint Tenancy with Right of Survivorship) – Joint Tenants each own equal, undivided shares of the joint tenancy asset but, unlike community property, there can be more than two tenants. (E.g. Groucho, Harpo, Chico, and Zeppo can each own ¼.) Joint tenants cannot sell their share without permission of the other joint tenants and the entire joint tenancy property may be reachable by the creditors of any one owner. When one joint tenant dies, their share in the asset passes to the surviving joint tenants without going through probate or receiving a step-up in basis. The last surviving joint tenant has an unlimited interest in the property and can sell or bequeath the property to whomever they choose.
For help transferring title to your California property or transferring your assets outside of probate, contact me at Christl@DeneckePlanning.com or see DeneckePlanning.com.
* There are nine community property states other than California: Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska also allows couples to elect to hold property as community property.